The Permian basin adds to U.S. shale bounty

On a wall inside an old hunting lodge in west Texas that Apache Corp uses as a field office, a board lists the winners of $10,000 prizes given to workers with big ideas to cut costs – the new way to get ahead in North America’s shale oil industry.

The shale boom that over the last five years has revived old Texas oil fields has largely made the unpredictable world of wildcatting, or looking for oil in new fields, a thing of the past.

Instead, the widespread use of hydraulic fracturing and horizontal drilling have turned oil production into something closer to a very expensive manufacturing process – where companies with the lowest well costs and fastest drilling times win. That’s especially the case as domestic oil prices fall and North American supplies swell to the highest level in 25 years.

Apache’s workers in Texas have come up with many ideas that have a common sense, low-tech appeal.

Building earthen bases, or pads, to hold multiple drilling rigs, using rocks and dirt taken from nearby hills to build roads, and cutting out the oil service company middleman by sourcing train cars of sand and chemicals have all saved money.

When companies perform hydraulic fracturing, water, chemicals and sand are blasted into a well at very high pressure to crack the rock and then collect oil and gas. Sections of the horizontal well are “fracked” in stages.

“If we are going to pump 40 frack stages, if I can save $3,000 a stage, that’s $120,000. That’s big money,” said John Christmann, a petroleum engineer who has more than two decades of experience in the Permian and was recently named to head up all of Apache’s North American operations.

West Texas Intermediate oil has fallen almost 11% since its peak this year of about $110 a barrel in August as producers pump more crude, so companies are trying to bring down costs to maintain profitability.

Apache’s costs on its Barnhart project in the Permian Basin – where it plans to drill about 70 wells into the Wolfcamp shale out of a Permian total of more than 800 wells – have fallen $1 million per well, or about 13 percent, to about $6.8 million in the last year and a half.

Although well costs vary widely depending on how deep and how far drilling reaches, rival Devon Energy Corp said its average cost for a Wolfcamp well in the third quarter was $5.5 million.

Laredo Petroleum Holdings Inc, a much smaller company that drills near Apache’s properties, said it is targeting a reduction to $6.8 million per well next year from $7.8 million now.

At Apache’s Ketchum Mountain field office in Irion County in the Permian Basin, the company’s 450,000 acres atop the Wolfcamp serve as a laboratory where workers are free to experiment.

“We are not a one-trick pony,” Apache’s Christmann told Reuters. “There are always things that we are testing.”

The biggest drop has been on the fracking cost. Apache is self-sourcing its own sand and chemicals. Experimenting with different drill bits – which can cost $50,000 or more – has also yielded faster drilling times, the executive said.

Pad drilling, or drilling multiple wells close together, helps Apache cut costs and work faster. At a Barnhart pad site, moving a rig to another drilling location – sometimes on skids slicked with Ivory Soap – takes only several hours. If the rig were moved to an entirely different pad, it would take days.

IMPORTING IDEAS FROM JAPAN
Companies expect to be in the Permian for decades to come. Though the historic basin was in decline a decade ago, new recovery techniques have given it new life. Experts say it holds more recoverable oil and gas than everything it produced over the last 90 years, according to the Texas Railroad Commission.

The basin is now the most productive onshore field in the country, pumping more than 1.3 million barrels per day. It has helped doubled output over the last few years in Texas, which is pumping 35 percent of the nation’s oil as the United States becomes the world’s top crude producer, according to the Energy Information Agency.

The Permian is different from other oil producing rock formations like the Bakken in North Dakota because it is made up of many different layers of rock, most of which are oil bearing.

That allows oil and gas companies the opportunity to drill into multiple formations on the same acreage if they hold the mineral rights. For example companies are targeting a 3,000-foot to 5,000-foot column of rock that contains many layers of oil and natural gas. That means small leases can bring big payoffs but also have higher associated costs.

“You can have what may seem like a smaller acreage position in the Permian,” said Jeff Sheets, the Chief Financial Officer of ConocoPhillips. “But just because there are lots of different opportunities within that same acreage position it can make a pretty interesting prospect for you.”

Companies in other shale formations, like the Eagle Ford of Texas, are also pouring over ways to speed up drilling operations that can cost $100,000 a day.

Norway’s Statoil has borrowed “lean production” techniques from Japan to whittle away at the time it takes to drill a well in the Eagle Ford. A couple years ago it took 60 days. Now it is half that.

“The perfect well initiative is based on an old Japanese manufacturing process,” of reducing the number of steps needed to complete a critical task, said Kevin O’Donnell, who oversees U.S. onshore drilling for Statoil. “Our line of sight is some day to get to 17 days. That’s the carrot we are chasing.”